Pages

Tuesday, September 30, 2008

Irish Green Paper on pensions considers "auto-enrolment"

Posted by
Martin Ryan

More than 380 submissions have been received by the Department of Social Affairs as part of the consultation process for the Irish Green Paper on Pensions. The key issues raised included pension reform options such as mandatory or auto-enrolment approaches, retirement age, and eligibility for the State pension and public sector pensions. More information on this is available here.

In this Business & Finance article from last year, myself and Liam Delaney discuss the interaction between economics and psychology with an application to retirement savings. The idea of "auto-enrolment" was evaluated by Madrian and O'Shea in their 2001 QJE paper: "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior". (401k plans are retirement savings schemes). Madrian and O'Shea found that participation is substantially higher under automatic enrolment and that a substantial proportion of people retain the default amount in the scheme even though this default amount varied among participants. They argue that automatic enrolment succeeds due to the inertia of potential program participants, and also perhaps due to the fact that employees interpret the default options as investment advice.

Also mentioned in the B&F article is the idea of "saving more tomorrow". The "Save More Tomorrow" initiative is outlined by Thaler and Benartzi in the Journal of Political Economy (2004). The idea behind this scheme is that people discount the future in a hyperbolic fashion. So Thaler and Benartzi offered people a scheme where they save a proportion of their future earnings. The idea is that people will not "feel the pain" so much if the saving is taken out of future salary and also if the saving does not result in any decline in living standards even over the short term. Thaler and Benartzi found that: (1) a high proportion (78%) of those offered the plan joined; (2) the vast majority of those enrolled in the plan (80%) remained in it through the fourth pay raise; and (3) the average saving rates for programme participants increased from 3.5% to 13.6% over the course of 40 months

Finally, the B&F article also mentions a recent Wharton school paper that reported on "Quick Enrolment". This paper ("Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment") is written by Choi, Laibson and Madrian. Despite this initiative essentially being a simplification of the 401(k) scheme rather than a major change in its monetary value, participation in this programme tripled 401 (k) participation rates among new employees at one company.

So there is an evidence base for how "auto-enrolment", "saving more tomorrow" and "quick enrolment" are beneficial for encouraging retirement savings. An OECD papaer from last year is also worth looking at: Tapia, W. and J. Yermo (2007): "Implications of Behavioural Economics for Mandatory Individual Account Pension Systems". This was mentioned by Liam on the blog earlier this year: here.

No comments:

Search This Blog

Blog Archive

About the Blog

The purpose of this blog is to provide a forum for discussing research in microeconomics, behavioural economics and cognate areas. We will also provide regular updates on work ongoing in behavioural science and behavioural economics at UCD Geary Institute and the University of Stirling Behavioural Science Centre. The blog is moderated by Liam Delaney